IMF Says our Economies are Looking Better, but the Outlook is still Fragile

According to the IMF, we are entering a new phase of the economic and financial crisis: the world has averted a depression, a recovery is taking hold (multispeed, depending on the country), and the recovery looks stronger than it had expected in the fall.

US growth this year is expected to be 3.1% (about half a percentage higher); and 2.6% next year (slightly higher). The Fund attributes the US recovery to fiscal stimulus, and notes that private demand remains weak.

While this is good news indeed, let’s not get too excited. Even with the upward revisions for the US, growth is expected to peak this year at 3.1%, not a strong rebound by historical standards. The upward revision means that the Fund is now in line with the Blue Chip Consensus forecast for 2010 but slightly below it for 2011. And then there are daunting unemployment problems.

That being said, we still look better than Europe and Japan. And, Canada looks better than the US, as do the newly industrialized Asian economies. Canada is expected to cruise for 2 years just above 3%. China’s growth is forecast to be a whopping 10%, with India close behind (8.8%).

Despite a better picture than we might have dared hope for a year ago, the outlook is fragile. The financial plumbing supporting the world’s economies has still not found a new normal, and severe problems remain. Countries have very little fiscal space to easily respond to new challenges (note, for example, that Iceland’s volcanic eruption will have fiscal costs in many countries, but especially in Europe and in those countries relying on trade by air with Europe). And, sovereign risk from high government indebtedness could derail the recovery, unless managed appropriately.

Under these circumstances, it is even more important than usual that the policy agenda be managed well. (See our next blog for more.)